MFIs redesigning business models a year after Andhra crisis : CRISIL

A year after the Government of Andhra Pradesh (Andhra) promulgated its ordinance for microfinance institutions (MFIs), leading to a major upheaval in the MFI sector, India’s MFIs are redesigning their business models. Driven by moderation in growth, decline in profitability and subdued funding prospects in their core business, several MFIs are starting new ventures that are focused on secured asset classes or leveraging their branch networks to offer other retail products.

CRISIL has consistently highlighted the need to increase stakeholder confidence for the long-term sustainability of the sector. The Reserve Bank of India’s (RBI’s) recent guidelines are a positive step in this regard, and are aimed at structurally strengthening the MFI sector over the long run. RBI’s revision in provisioning norms and change in recognition of non-performing assets (to 90 days overdue from 180 days overdue) is unlikely to impact the profitability of the non-Andhra operations of CRISIL-rated MFIs over the medium term.

The MFI sector’s growth and profitability prospects have moderated since implementation of the Andhra ordinance, because of the subdued funding environment and operating challenges associated with regulatory restrictions on multiple lending, loan size, and end-use of loans. While there has been some regulatory clarity and selective lending by banks in the last few months, funding to the sector has not picked up. CRISIL-rated MFIs have raised Rs.5 billion from banks and alternate sources in 2011- 12—much lower than the pre-ordinance levels.

MFIs are, therefore, diversifying their business models by starting new ventures aimed at entering other asset classes (mostly secured, such as loans against gold jewellery, housing and vehicle financing loans). Some MFIs have moderated their growth plans, while others have opted to leverage their branch network to offer retail products. Says Mr. Nagarajan Narasimhan, Director, CRISIL Ratings, “While most of these new business initiatives are at an early stage, MFIs’ ability to develop systems and processes, and scale up operations will shape their business risk profiles.”

RBI’s recent guidelines have created a new category of non-banking financial companies (NBFCs) called NBFC-MFIs. The guidelines also highlight the need for transparency in interest rates, and address issues on multiple lending and coercive recovery. CRISIL believes that these steps will enhance stakeholder confidence in the sector. Key changes in the guidelines include revised provisioning norms and asset classification for NBFC-MFIs; relaxation in the minimum requirement for net owned funds, and in the minimum capital adequacy ratio requirement for 2011-12 for MFIs with sizeable exposure to Andhra.

Adds Ms. Rupali Shanker, Head, CRISIL Ratings, “The gross non-performing asset ratio for the non-Andhra operations of CRISIL-rated MFIs will increase to around 2 per cent from 1 per cent as on March 31, 2011, if the revised asset classification norms are made effective as on that date. It does not reflect any change in MFIs’ inherent asset quality, though the MFIs will now focus on containing delinquencies of up to 90 days.”

CRISIL will continue to monitor MFI sector developments and their impact on the credit risk profiles of the entities rated by it.